Deal dynamics: Why the asset swap deals with Exxon are beneficial for LINN Energy



Deals benefit LINN Energy

In the four months between May 21 and September 18, LINN Energy (LINE) and ExxonMobil (XOM) entered into two asset swap deals. The deals involved the companies’ acreage and production spread across Texas, Kansas, Oklahoma, California, and New Mexico.

LINE showcased the deals. They hold many advantages for the company.


Key advantages for LINE

The benefits of the deals include:

  1. LINE describes the assets it received from XOM as “mature”—well developed and having high certainty of reserves. This means that it can spend less developing these assets. It will spend less than it would have on the undeveloped assets it swapped out to XOM.
  2. The deals are in line with LINN Energy’s strategy to swap out acreage with steep declines in production. It swaps them out for acreage with shallower decline rates. Production from shale and tight oil wells usually starts declining immediately after it’s drilled. Shallower production decline rates would mean longer production lives.
  3. The acquired assets fit in well with LINE’s existing properties. They allow the productive use of its Jayhawk natural gas processing plant for new production from the Hugoton field.
  4. The way assets have been swapped in both deals minimizes taxes payable.
  5. The “mature” nature of assets in both deals increase LINE’s proved reserves. It also improves LINE’s stability and level of cash flows. These help improve LINE’s credit rating, reduce its interest burden, and allow it to raise cheaper capital in the future.

Mark E. Ellis—LINE’s Chairman, President, and CEO—explained the company’s philosophy behind the deals.

He said, “another strategic portfolio improvement for our Company that reinforces our commitment to mature, long-lived oil and natural gas assets with low and predictable decline rates.”

Key exchange-traded funds (or ETFs)

XOM and LINE are constituents of several energy ETFs. ETFs are a great way to gain diversified exposure to the U.S. energy boom.

Two of the largest and most traded ETFs covering the sector are the Energy Select Sector SPDR (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Master limited partnerships (or MLPs) are also a great way to play the U.S. shale boom. You can gain exposure to the sector through the Alerian MLP ETF (AMLP).

Check out our series covering MLP basics here.

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